Unum 2007 Annual Report Download - page 38

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
36 Unum 2007 Annual Report
Deferred Acquisition Costs (DAC)
We defer certain costs incurred in acquiring new business and amortize (expense) these costs over the life of the related policies. Deferred
costs include certain commissions, other agency compensation, selection and policy issue expenses, and field expenses. Acquisition costs
that do not vary with the production of new business, such as commissions on group products which are generally level throughout the
life of the policy, are excluded from deferral.
Over 90 percent of our DAC relates to traditional non interest-sensitive products, and we amortize DAC in proportion to the premium
income we expect to receive over the life of the policies in accordance with the provisions of Statement of Financial Accounting Standards
No. 60, Accounting and Reporting by Insurance Enterprises. Key assumptions used in developing the future amortization of DAC are future
persistency and future premium income. We use our own historical experience and expectation of the future performance of our businesses
in determining the expected persistency and premium income. The estimated premium income in the early years of the amortization
period is generally higher than in the later years due to higher anticipated policy persistency in the early years, which results in a greater
proportion of the costs being amortized in the early years of the life of the policy. During the years 2005 and 2006, our key assumptions
used to develop the future amortization did not change materially. We adopted the provisions of SOP 05-1 effective January 1, 2007.
The adoption of SOP 05-1 shortened the amortization period of our Unum US and Unum UK group disability, group life, and group accidental
death and dismemberment products, as shown below. The amortization periods for the other product lines were not impacted by the
adoption of SOP 05-1. Generally, we do not expect our persistency or interest rates to change significantly in the short-term, and to the
extent that these trends do change, we expect those changes to be gradual over a longer period of time.
Presented below are our assumptions, both before and after the adoption of SOP 05-1, for the years 2007, 2006, and 2005, regarding
the length of our amortization periods and the approximate DAC balance that remains at the end of years 3, 10, and 15, as a percentage
of the cost initially deferred.
2007 2006 and 2005
Balance Remaining as a % Balance Remianing as a %
Amortization of Initial Deferral Amortization of Initial Deferral
Period Year 3 Year 10 Year 15 Period Year 10 Year 15
Unum US
Group Disability 6 25% 0% 0% 20 25% 10%
Group Life and Accidental Death & Dismemberment 6 20% 0% 0% 15 15% 0%
Supplemental and Voluntary
Individual Disability — Recently Issued 20 75% 50% 25% 20 50% 25%
Long-term Care 20 80% 55% 25% 20 55% 25%
Voluntary Benefits 15 60% 15% 0% 15 15% 0%
Unum UK
Group Disability 6 25% 0% 0% 15 20% 0%
Group Life 6 20% 0% 0% 15 20% 0%
Individual Disability 15 60% 15% 0% 15 15% 0%
Colonial Life 17 60% 20% 10% 17 20% 10%
Amortization of DAC on traditional products is adjusted to reflect the actual policy persistency as compared to the anticipated experience,
and as a result, the unamortized balance of DAC reflects actual persistency. We may experience accelerated amortization if policies
terminate earlier than projected. Because our actual experience regarding persistency and premium income has varied very little from
our assumptions during the last three years, we have had minimal adjustments to our projected amortization of DAC during those years.
We measure the recoverability of DAC annually by performing gross premium valuations. Our testing indicates that our DAC is recoverable.